Thoughts from the Frontlines on Asia’s Next Tiger

Mongolia is growing rapidly, but the media continues to downplay the country’s economic expansion. After spending 5-months on the ground, the opportunities seem even greater now to invest in the world’s most exciting growth story.

Yes, we are beating this (Mongolia) to death once again. However, when we believe in a trade we go for it. We’re speculators, plain and simple. We’re often early and we’re sometimes wrong. That’s the rub. With Mongolia we think we’re right, as we said in our post, The End of The World… So, Why Are We Buying NOW in Mongolia?

To get a feel for a place you either have to spend significant (I don’t mean a few day or a week) time on the ground, as we do, or you have to have well-placed friends you trust…ideally both!

Sometimes even when your gut tells you to jump, human nature keeps you from going all-in exactly when you should. Mongolia seems to be at that point right now. One of my favourite tells is when the media goes on a rampage against the country, as it has in recent months. Mainstream media can’t stop fixating on a “corrupt” (is there really any other kind?) government and the (yawn) Oyu Tolgoi negotiations. How can any rational person believe the Mongolians are going to hobble this project?

Meanwhile, Peace Avenue (the main road in Ulaanbaatar) is a virtual parking lot with all the vehicles and people buzzing around.

Don’t get me wrong, there are issues, but they are overblown in our opinions. Therefore, I want to touch on some specific economic points the media fails to cover. As you’ll see, Mongolia is truly an entrepreneur’s wet dream.

#1: Think outside of the mining sector

When most investors think Mongolia they think mining. Oyu Tolgoi and Tavan Tolgoi will be mainstays of the economy for decades; there’s no doubt about that. Though, the mining sector is subject to political risk from both Mongolia and its neighbors, something that is too uncertain for our liking. Why not get away from it all and invest in a sector not dependent on mining?

Speaking with a friend who operates in the mining supply chain, tyres specifically, he mentioned the challenges he faces supplying product to the mines. Logistics is a big one, not to mention finding local talent. But beyond that, we spoke about how difficult it is essentially being hostage to commodity prices and Chinese demand. Think about it, who wants their business to suffer if the Dalai Lama comes to Mongolia again and the Chinese shut the border?

Going beyond mining, some of our good friends on the ground are doing just this. They are operating businesses that run the gamut from foreign exchange services to real estate to cashmere de-hairing, fire safety equipment and textiles…and they are making a killing.

Mongolia is the only FSU country that is a fully-fledged democracy. It is easy to start a business, there are no foreign exchange controls and FDI is encouraged, regardless of what has happened in the mining space as of late.

Some sectors I have been investigating include agriculture, fire safety, cashmere trading, and import and export. I forgot to mention parking structures, valets for restaurants, maid services, interior design, personal chefs, anything to do with luxury goods…you get the point.

#2: Import? Why not export?

As a species not keen on change, when people move somewhere new they tend to want the creature comforts of home. Therefore, there is a tendency to fill the void with imports, and it can be justified as a business opportunity.

Unfortunately, for the aspiring importer, Mongolia is well saturated with a variety of consumer products. For example, Nomin (a local conglomerate) alone has exclusivity for over 400 international brands. Just walk into the State Department Store and you’ll see what I mean. Beyond that, trading works on volume as margins are low. Unfortunately, Mongolia’s population of 2.8 million isn’t going very far, very fast.

But I digress; I foresee the real opportunity being in export. Find out what the country produces and identify an end-market. One product ideal for export is vodka. Mongolians have been distilling vodka for hundreds of years and it just so happens to be that they produce some of the best in the world. The major players are Gem, UFC and APU and they are selling vodka retail for under $20 per litre. The global vodka market is in the billions, so being successful with vodka could be highly profitable.

Another exciting industry is meat processing. Mongolia has 40 million head of cattle and, to reiterate, has 2.8 million people. That’s almost 16 cattle per person!  With so many animals, whoever moves into meat processing for export will make multiples on their investment, if executed correctly of course. It would be hard to fail, as there are 1.6 billion hungry Chinese down south who are demanding ever-greater quantities of protein.

#3: Mongolia should be an export powerhouse in agriculture and electricity

A frequently repeated question of this century will be “what does China want.” Two things I forecast the country needing are food and electricity; two things Mongolia has the land for and potential to do very well.

Upon arrival in Mongolia it doesn’t take long to realize how desolate the place is. After all, it is the least densely populated country on the planet. This sets the stage for Mongolia, and the rest of Central Asia for that matter, to become the breadbasket – and “battery” – of the continent.

Supplying that which China needs is already underway with mineral resources, though if the Chinese can’t eat and power their homes, then they won’t want copper and coal. Surely this will take time to evolve, but if the Mongolian government is smart and incentivizes clean energy production and agriculture, the country could be wealthy for centuries.

#4 Move to Mongolia if you want to gain maximum leverage

I think one of the best kept secrets about Mongolia is that no one wants to live there. As I write this, it is -42 Centigrade, walking on the street is noxious due to exhaust fumes and the air pollution is among the worst in the world. However, for the intrepid entrepreneur the bounties can be enormous.

Once you arrive, identify a problem (there are plenty) and go from there. The proverbial door remains wide-open in many industries and until people open shop, they won’t have direct leverage to the growth of what could become Asia’s next Tiger.

On that note, if you are pumped about the opportunity but less excited about moving to Mongolia, you can invest without leaving home! Back in July 25 investors, hedge fund managers and entrepreneurs joined us for our Meet Up in Ulaanbaatar.

-Scott

“If you have men who will only come if they know there is a good road, I don’t want them. I want men who will come if there is no road at all.” – David Livingstone

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Pete
Pete
7 years ago

Yep. The place can rule the world again if they eventually get it right. Too bad the old men are fighting amongst themselves right now and being more “politician” than the jokers in the West, being very shortsighted and trying to buy power by threatening FDI in the resource sector.

My optimism comes from meeting and seeing the young men and women in Mongolia; having spent most of my past 25 years in Asia and being married into Chinese culture I have to say the young Mongolians REALLY impress me. They are bright, educated, proud, independent and seem very different from the rest of Asian kids. I think once they start getting the reins of power (and that will take time), they will transform their country into the “export powerhouse”.

As you point out, if they become a prime supplier of energy (especially if it is produced in Mongolia, i.e. electricity) and food to the Chinese then they gain enormous leverage and ability to direct their future. And then, if they manage their currency/finances properly, they could become the purest safe haven or resource currency out there while not needing to devalue for export competitiveness.

I continue to send money up there and gradually try to get positioned. It is not without risk however! It appears an IPO in Silikat that was recommended by my broker there will go to zero……But there are many good folks on the ground there – most introduced by CapEx – who can guide the outside investor.